Working Paper: CEPR ID: DP10891
Authors: Dennis Bams; Magdalena Pisa; Christian Wolff
Abstract: This paper studies early default risk spillovers to small businesses. This study shows that default rates among small businesses are significantly higher following default on S&P rated debt in their or their customers' industries. Using a new data set on S&P rated debt default, small business default, production process linkages and industry characteristics, we find evidence of negative wealth effects transmitted to small businesses along the production process. Also, such ripple effects are mitigated in loan portfolios that are concentrated into large and highly interconnected industries. We observe that a large number of firms in an industry serves to cushion default risk transmission. This is much like how the broad economic connections other the benefits of diversification.
Keywords: default clustering; default risk transmission; market structure; supply chain
JEL Codes: G17; L14; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| defaulted debt in customer industries (G33) | small business default rates (M13) |
| defaulted debt in the same industry (G33) | small business default rates (M13) |
| industry concentration (L69) | small business default rates (M13) |
| distress in one industry (L99) | small business default rates (M13) |